Ben Graham's Corner

The

Bubble has Returned!

DYI:  Investing when known where to find the data is a straight forward and simple affair.  Those holding or purchasing stocks today on a wholesale basis such as a S&P 500 index fund or a broad based managed stock fund commonly found in a majority of 401k’s can expect a total annual return over the next 20 years – drum roll please – 3.76%!  This calculation estimation [surprisingly close to actual returns] – can be found by going to moneychimp.com for predicting future returns.  All you have to do is plug in the current Shiller PE and current S&P 500 dividend yield all found by going to multpl.com.  This takes about 2 minutes of your time but will make a world of difference in your long term return of your personal finance.

Mortgages

Most mortgages today such as a 30 year FHA annual percentage rate is around 3.80%.  Depending on how many years remaining this is a straight forward comparison.  Say you have 25 years to go and compare the estimated return for the same amount of time.  Should you make additional mortgage payments or put your money into stocks?  Back to moneychimp.com plug in the numbers for 25 years and today’s valuations here is what we get for our hard earned dollars.  4.38% as compared to 3.80% [or whatever your mortgage rate is].  So…Stocks are the better deal – expect one hell of a roller coaster ride – surprising despite insane valuations due to sub atomic low interest rates powered by Fed intervention equities remain the better deal.   

Side Note

Ben Graham’s Corner has stocks safe for dollar cost averaging.  His simple arithmetic is a comparison between bond returns or stocks.  Again due to MASSIVE Fed intervention interest rates are incredibly low thus stocks are the better deal [even though future stock return remain dismal at best!].      

   

Ben Graham's Corner

Margin of Safety!

Central Concept of Investment for the purchase of Common Stocks.

"The danger to investors lies in concentrating their purchases in the upper levels of the market..."

Stocks compared to bonds:

Earnings Yield Coverage Ratio - [EYC Ratio]

EYC Ratio = 1/PE10 x 100 x 1.1 / Bond Rate

1.75 plus: Safe for large lump sums & DCA

1.30 Plus: Safe for DCA

1.29 or less: Mid-Point - Hold stocks and purchase bonds.

1.00 or less: Sell stocks - Purchase Bonds

Current EYC Ratio: 1.51(rounded)

As of  7-1-20
Updated Monthly

PE10 as report by Multpl.com

Bond Rate is the rate as reported by

Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX)

DCA is Dollar Cost Averaging.
Lump Sum any amount greater than yearly salary.

PE10  ..........29.07
Bond Rate...2.51%

Over a ten-year period the typical excess of stock earnings power over bond interest may aggregate 4/3 of the price paid. This figure is sufficient to provide a very real margin of safety--which, under favorable conditions, will prevent or minimize a loss......If the purchases are made at the average level of the market over a span of years, the prices paid should carry with them assurance of an adequate margin of safety.  The danger to investors lies in concentrating their purchases in the upper levels of the market.....

Common Sense Investing:
The Papers of Benjamin Graham
Benjamin Graham

DYI